Deutsche Bank: Upside Risks Remain for British Pound Amid Positive Data and External Backdrop

Image © Deutsche Bank

According to a recent report by Deutsche Bank, the market's expectations for the British Pound may have become overly optimistic in recent weeks.

While positive economic data and the absence of negative news have helped to push the pound to around its initial target of 1.25, Deutsche Bank's Shreyas Gopal warns that "most of the good UK news is now likely in the price."

Despite this caution, however, Gopal suggests that the risks to Deutsche Bank's GBP/USD forecasts for Q2 and Q4 are still skewed to the upside.

He notes that the Pound remains cheap, which has been the case "for nearly a year now."

The report suggests that the external backdrop and the convergence of the market to Deutsche Bank's view that UK growth expectations can be upgraded in line with other major economies for this year mean that the risks to the bank's Pound-Dollar forecasts are still skewed to the upside.

Investors will likely be closely watching the Bank of England's next meeting in May for any signals about the future of interest rates and the Pound's performance in the coming months.

The market raised its expectations for another 25 basis point interest rate hike at the Bank of England to just above 70% this week in reaction to a speech given by the Bank's economist Huw Pill.

Pill said the Bank needed to "see the job through" and "a pause" was not "necessarily" communicated by the Bank in its March guidance.

Elsewhere, Deutsche Bank notes the UK's latest current account data confirms its view that the UK's external vulnerabilities are now much reduced.

This is because gas prices have continued to fall and are tracking well below levels from this time last year.

Another reason is the UK's concentration of FDI within the energy sector means that returns have outperformed peers despite the UK's negative direct investment position.

"Repatriation of these profits into GBP, e.g. for dividend payments, could prove supportive," says Gopal.

"All up, the domestic good news may now be in the price," says Gopal, but given the external backdrop, the risks to Deutsche Bank's forecasts (Q2: 1.25, Q4: 1.28) "are still skewed to the upside."

Deutsche Bank likes being 'long' GBP against the U.S. Dollar and Swedish Krona.